illegal participants

[Guest Betsy Oakey]

I have a 403b client in one city who was asked to assist a similar type charity in another city on some similar administration issues in general that they were having problems with (bookkeeping kind of stuff). While he was visiting they expressed that they would also like to have a pension plan. So, he invited them to participate in his plan. NOBODY TALKED TO US! Somehow they enrolled several folks from the second city payroll with the annuity company that holds the assets. During 2005 a check was cut from the second charity payroll to my client's payroll and deposits were made for both deferral and match. This amazes me because they are unable to enroll their own folks without our assistance. How they were able to get these 10 other people from a totally unrealated company enrolled is beyond me.

Of course, no documents were done or amended to adopt the plan by the second charity. We did not include any of these folks in testing because we were unaware of the situation until we did trust accounting and 10 people showed up with accounts that were not on my clients payroll.

And finally my questions. How do I fix this? I believe that once I explain how nasty the ACP testing results will be (they fail every year and now they want to add another 100 people with only 10 actually deferring). Can we just make distributions to all the "illegal" folks? Do I need to file VCP, which is totally cost prohibitve for this charity client? I do not believe they had any idea that these actions were not compliant. They just wanted to give the folks in the other city an apportunity to have a plan, and figured, use ours, it's already set up. Don't just love our jobs? Any input would be appreciated.

[Guest mjb]

is this charity a public employer or an 501©(3)? Are the two charities part of a controlled group?

[GBurns]

You stated that this is a 403(b) client, you did not say that they were or were also a pension plan client and this is a 401(k) Forum. So I have to ask what sort plan are these second charity people enrolled/participating in?

[Guest Betsy Oakey]

is this charity a public employer or an 501©(3)? Are the two charities part of a controlled group?

Public employer and not a controlled group.

[Guest Betsy Oakey]

You stated that this is a 403(b) client, you did not say that they were or were also a pension plan client and this is a 401(k) Forum. So I have to ask what sort plan are these second charity people enrolled/participating in?

You are right I should have posted to 403b. The second group is enrolling in the first groups 403b plan. One plan, two unrelated groups. Nothing was done as far as the document is concerned to allow the second group to enroll.

[Guest mjb]

Under IRC 413(b)(12) © nondiscrimination requirements and participation rules do not apply to public employers who adopt 403b plans. If new entity is public employer above rules will not apply to additonal participants. Should amend the 403b plan document to allow participation by public charity for eligible employees.

[Guest Betsy Oakey]

Under IRC 413(b)(12) © nondiscrimination requirements and participation rules do not apply to public employers who adopt 403b plans. If new entity is public employer above rules will not apply to additonal participants. Should amend the 403b plan document to allow participation by public charity for eligible employees.

Even if they are making match?

[Guest Betsy Oakey]

Under IRC 413(b)(12) © nondiscrimination requirements and participation rules do not apply to public employers who adopt 403b plans. If new entity is public employer above rules will not apply to additonal participants. Should amend the 403b plan document to allow participation by public charity for eligible employees.

Even if they are making match?

I just found out I was incorrect. The employer entities (both) are 501c(3)

[Guest mjb]

Are you sure it is a private non profit? A 501c3 estabished as an instrumentality of a public entity such as city, e.g. a public hospital, is exempt from the nondiscriminaton rules.

[Guest Betsy Oakey]

Are you sure it is a private non profit? A 501c3 estabished as an instrumentality of a public entity such as city, e.g. a public hospital, is exempt from the nondiscriminaton rules.

Yes, it is a private non profit. From the research I have done, it does seem that they are an ERISA plan. I guess my question is what is the most efficient way to fix this. Can we self correct and take all the other companies funds out of the plan or will we have to file VCR?

[Guest mjb]

First you need to determine whether correction is needed. If the two entities are not part of controlled group charity or do not have interlocking board members the new entity will be tested separately for discrimination which only applies to benefits provided to persons earning over 95k.

[Guest Betsy Oakey]

First you need to determine whether correction is needed. If the two entities are not part of controlled group charity or do not have interlocking board members the new entity will be tested separately for discrimination which only applies to benefits provided to persons earning over 95k.

You learn something new everyday. No they are not a controlled group, and they do not have any interlocking board members. I didn't realize they could be tested separately, but then I have never had two unrealated entities adopt the same plan. Which brings up my next question. The second group did not officially adopt the plan. This is where it gets a little mucky for me. I believe if this was a 401(k)/Pension Plan we would have a VCP issue. However, I am confused about the actual law regarding the mandatory requirement for a 403b plan document. I think I have determined, that because they are considered a 403b ERISA plan they should really have a proper document in place, which they do for the first company, but not for the second. I have not contacted the client about this issue yet. We were hoping to have all the alternatives ready to discuss. By some miricle, they may have had some kind of documents done, or maybe they had the annuity company do something, but I doubt it.

Thank you for all your assistance thus far.

[Guest mjb]

Under current IRS regs there is no requirement that an employer adopt a plan document for a 403(b) plan (the proposed regs to be effective in 2008 will require that the employer adopt a written plan.) ERISA only requies that the plan be in writing. I dont know what would be required of an employer who participates in another employer's 403b plan other than an agreement to make contributions to the plan on behalf of its employees but there is no penalty for retroactrive adoption of such an agreement.

[Guest Betsy Oakey]

Under current IRS regs there is no requirement that an employer adopt a plan document for a 403(b) plan (the proposed regs to be effective in 2008 will require that the employer adopt a written plan.) ERISA only requies that the plan be in writing. I dont know what would be required of an employer who participates in another employer's 403b plan other than an agreement to make contributions to the plan on behalf of its employees but there is no penalty for retroactrive adoption of such an agreement.

You have made my day - thank you again for all the assistance.